Student loan consolidation is a smart option for students, parents, graduates and alumni that are now seeking to consolidate federal student loans debt.

Federal student loan consolidation will lower interest rates and save money. Student loan debt consolidation has become popular and many college student loan consolidation centers and services are out there to consolidate all types of loans; be them federal, direct, medical, law, Stafford, PLUS, government and private student loans. Today’s Interest rates are the lowest they have been in decades. Consolidating federal student loans allows you to lock into a federal consolidation loan at a low FIXED rate.

Consolidating College Student Loan Debt

A study from the National Center for Education Statistics tells that roughly half of college alumni have an average student loan debt of $10,000 US. The average cost of a college education increases at two times the rate that inflation does. Public Universities are currently estimated to cost $13,000 a year, while private colleges and universities are estimated to cost $28,000 annually. These increasing costs of education leave both parents and students with increasing student loan debt.

How does student loan debt consolidation help save money?  By lowering your monthly payment and lowering your interest rate, which ultimately decreases the total loan principal and interest amount you pay over time.  Debt consolidation also helps you to manage your cash flow, and stay on top of your budget.

How does college student loan consolidation actually work?  When your student loans are consolidated,all of the outstanding balances of your existing student loans are paid off, with the total balance rolling over into one consolidated student loan.  When you refinance and consolidate your student loans, the end result is that you have only one FIXED RATE student loan to pay on.

What types of student loans are eligible for Federal student loan consolidation?

• Federal and Federal Direct Stafford Loan (subsidized and unsubsidized)
• Federal and Federal Direct PLUSXX
• Perkins Loans
• Federal Perkins (formerly known as National Direct Student Loan or NDSL)
• Nursing School Loan (NSL)
• Health Professional Student Loan (HPSL)
• SLS (Supplemental Loan for Students)
• Loans for Disadvantaged Students (LDS)
• Federal Insured Student Loan (FISL)
• Federal Consolidation Loan
• Federal Direct Consolidation Loan

In addition to the student loans mentioned above, all undergraduate, graduate, law medical and private student loans are also available for student loan debt consolidation.

How Student Loan Consolidation works

A student consolidation loan combines several federal student or parent loans into a single larger loan.  Most federal loans can be consolidated: Stafford, PLUS (Parent Loans to Undergraduate Students), Supplemental, Direct, Perkins and others. Some lenders will consolidate private college loans as well. The U.S. Department of Education offers Direct Consolidation Loans (www.ed.gov/directloan/ or 800-557-7392), as do many private lenders (www.finaid.org links to several private lenders).

A consolidation loan reduces the size of the monthly payments, usually by extending the terms of the loan beyond the normal 10 years, to 20 or even 30 years.  That makes it more manageable for borrowers to make payments, especially younger people lower on the pay scale. Sometimes consolidation is necessary for people to qualify for a home mortgage.

Consolidation may especially be warranted if you’re not making payments and risk default on your loans. This will hurt your credit rating. Furthermore, the federal government can divert your tax refunds toward the loans or garnish your wages, even on very old student loans. Consolidation also can help you put the saved dollars toward higher-interest debt such as credit cards. Credit-card debt isn’t tax deductible, while you may be able to deduct up to $1,000 in student loan interest.   To get more detail on student loan debt consolidation check out StudentLoanHome.info or order the Ultimate Student Loan Consolidation Guide.

Will a consolidation loan reduce the interest rates on loans?

Not necessarily. The interest rate on the consolidation loan would be the weighted average of the interest rates of the loans you’re consolidating, rounded up to the nearest 1/8 of a percent. Depending on weighting, you actually could end up paying a higher interest rate, though more likely the rate will be lower. Federal law requires variable-rate direct subsidized and unsubsidized consolidation loans to be capped at 8.25 percent, while PLUS consolidation loans are capped at 9 percent. That’s when the government annually readjusts interest rates for the year for student loans, and those rates will likely reflect the recent climb in other types of interest rates.

Downsides to Student Loan Debt Consolidation

The most obvious downside is that even though your payments are smaller, you are extending them over a longer time.  That means you’ll pay out more total interest.  Also, as with any kind of student debt consolidation loan, the borrower may be tempted to spend more or even borrow more because of the smaller loan payments.  Then you’re just piling up more debt than if you hadn’t consolidated.

Alternatives to Debt Consolidation to Consider

Try first to tighten up your budget to free up more dollars to meet your loan payments, or take on a second or better-paying job.

If you’ve managed to pay your nonconsolidated loans on time for close to 48 months, try to hang in there a little longer.  Lenders commonly drop the interest rates significantly, say two percent, for borrowers who have paid on time for 48 months (sometimes for only 24 months).

Also check out two options offered by the federal loan program. The income-sensitive repayment option bases monthly payments on your total gross monthly income. Under the graduated payment option, payments start out smaller and increase gradually on the assumption that your earnings will increase. Increased payments cannot exceed three times the amount of the initial payment. Although the total interest you pay will increase under these options versus sticking to the original loan schedule, the increase will be less than that of a consolidation loan.

You may be able to defer, or even outright cancel, a student loan if you teach in a low-income area or you teach full-time in a subject area that’s short of teachers. You also may defer federal student loans if you’re unemployed, return to school, go into the military or become disabled.

The important point is that while consolidation of an education loan may be the right choice for you, there are downsides and alternatives to consider before making a final decision.

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3. How to Get out of Debt
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